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Hullabaloo


Thursday, September 29, 2011

 
Financial institutions: anachronistic parasites
by David Atkins

It's easy for those who obsess over daily news cycles to lose perspective about our place in history. As much as we believe that the economic institutions and modes of governance we've established are the result of centuries of fine tuning, the reality is that our modern world is a very new creation. Modern democracy is only a couple of centuries old, and only very recently has it been applied to all citizens in most democracies worldwide. The modern social welfare state is only about 60-70 years old. The industrialized world only abandoned the gold standard a mere 40 years ago. The rise and fall of communism as a serious challenge to capitalism only occurred in the last century, and the battle was only truly decided 20 years ago. Humanity is still very much in its infancy stages, experiencing rapid growth and evolution not only in terms of technological advancement, but the advancement of social and economic systems as well.

So inasmuch as the modern world takes massive private banks and credit card companies for granted as part of the established order of things, the reality is that these are new phenomena. Lenders and lending institutions have been around for millennia, of course, but most societies throughout history have held tight controls, either through religious or secular lawmaking, on usury. Moreover, governments and societies have seen fit to control the predations of financial institutions by simply seizing assets, or declaring jubilees. The inordinate power of lending institutions over governments and consumers that we are seeing today is a very recent phenomenon in span of human civilization. It is not the norm, it is not necessary, and it is hard to imagine that it will continue for long as humanity gropes its way forward in search of a better future.

It's important to remind ourselves of this fact when we see stories like this:

Starting Saturday, big banks must comply with a new regulation that caps the fees they can charge merchants for processing debit card purchases. But some consumers are already seeing the impact of the change, in the form of higher fees charged on their checking accounts, as banks seek to recoup lost revenue.

Bank of America is the latest bank to say it will begin charging a monthly fee for checking accounts that use debit cards. Starting early next year, the bank will charge $5 a month, in any month that the customer uses a debit card to make a purchase. (If customers have a debit card, but don’t use it, they won’t incur the fee.) The fee won’t apply to A.T.M. transactions, and it won’t be charged to customers with certain premium accounts, a bank spokeswoman, Betty Riess, said. “The economics of offering a debit card have changed with recent regulations,” she said.

Bank of America joins banks including SunTrust and Regions in charging the fees. Other institutions, like Wells Fargo and Chase, are testing them, too. And over all, bank fees have crept up to record levels, a recent survey found.

The added fees have come even though the limit on the merchant fees wasn’t as low as banks initially had feared. (The Federal Reserve originally considered a cap of 12 cents, or half of what it finally set.)

While consumers are seeing the impact of the change in their bank accounts, any potential savings benefit at stores is likely to be muted. “I don’t expect there to be any visible effects at the cash register,” said Aaron McPherson, practice director for payments at IDC Financial Insights. When similar caps were put in place in Australia, he said, merchants there didn’t pass along savings, so it’s unlikely that will happen here either.

That’s because, retail groups say, stores aren’t going to benefit as much as they had originally hoped under the new cap, and some merchants may actually pay higher fees.

Essentially, what happened here is that banks have been gouging retailers big and small for the convenience of allowing a customer to use a debit card. They and the credit card companies have also been gouging retailers for allowing them to use credit cards, too, for no good reason. But that's another story.

The Federal Reserve, in a long overdue move, told the banks that they couldn't gouge retailers so much anymore. So now the banks are going to charge consumers for using their own debit cards. Meanwhile, the retailers are predictably not passing along the savings from fees to consumers--first, because the notion that retailers ever really pass on savings to consumers is something of a joke, and second because the fees themselves really didn't come very much, especially on the sorts of small transactions for which the debit card swipe would be most useful.

Now let's be clear about what this means. When you put money in a bank, it's your money. The bank uses that money to lend out to others, and make more money itself off interest. The bank hands you a little card that allows you to pull out your own money. The bank isn't lending you the money; it's simply allowing you to use the money in your account. The card simply facilitates the process, and costs the bank nothing. No need to use a bank's ATM or visit a teller to pull out cash. The cost to the bank in using this system is minimal. The bank makes its money off debit card users in the form of overdraft charges and other fees. Charging a fee for using the bank's debit card to access your own money is an amazing insult--especially when considering how many banks offer "free" checking accounts on condition that consumers--you guessed it--use their debit cards at least once a month.

When you go to your local coffee shop and use a debit or credit card, the retailer is getting gouged by the bank/credit card company for allowing you to use that card. And if the consumer carries interest on the credit card or happen to overdraft on the debit card, the bank/credit card company gouges the consumer for using the card as well. And now the banks are tripling the gouge: in order to "make up" the lost revenue on fees that have actually increased for the most useful small debit transactions, they are gouging consumers for even daring to use a debit card.

Does the world need to perpetuate this system? No, it does not. Mobile payment systems are increasingly taking hold in the marketplace, allowing for customers and retailers to carry their own tabs with the retailer directly, essentially bypassing the lending institution and their debit/credit cards. Starbucks already has an app to do just that, which has the banks and the credit card companies running scared, and for good reason.

And, of course, the debit card situation is merely analogous to the parasitic behavior the lending institutions have been perpetuating on governments around the world for decades.

There will come a day when these institutions are brought to heel. Credit is important to keeping the engine of the world economy humming, but not at the cost the lending institutions are demanding. As I've said before:
the economy is like a engine. Demand fuels it. A strong middle class is the best way to ensure that the fuel level stays high. Credit via lending is a lubricant, sort of like motor oil. In exchange for providing that lubricant, financiers are allowed to skim off the top and make out like bandits even in times of relative equality. Lately, however, the financiers have been playing radical games to suck economy-killing amounts out of the tank, while the economy sputters to a stop due to lack of demand. In this situation, it would seem that government would be best suited to shunt the vampire financiers off to the side, provide a fuel injection of demand and oil up the engine itself on behalf of the people. The only problem is that the vampire financiers have too tight a control on government policy through corruption, and aren't about to be pushed aside. It really isn't much more complicated than that.

But pushed aside they must be, and pushed aside they will be, one way or another. If it is not allowed to happen peacefully under the rubric of political and legal reform, the revolution will take a decidedly more unseemly turn. Humanity has always found a way to remove tyrannies that limit its potential one way or another.

The financial sector currently represents the greatest threat to human happiness and freedom. Corralling the financial sector, bypassing it when possible and shrinking it down to manageable size are simply the next logical steps in the evolution of human society.


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